Let’s explore the current state of the mortgage REIT market, then examine each of the stocks above to see why insiders might be buying.

Approach With Caution

In a recent announcement, the Fed dispelled all concerns regarding the risks and the probable halt of its aggressive $85 billion per month bond buying program. Therefore, the mortgage REITs sector will be hurt further.

The massive bond buying program is aimed at keeping the long-term mortgage rates lowm while the Fed keeps the short-term rates near zero. As a result, the interest rate yield curve began to flatten, and continued easing would mean further flattening.

Mortgage REITs invest in mortgage backed securities and receive yields that are linked to the long-term mortgage rates. They invest in MBS using short-term financing and pay the cost that is linked to the short-term borrowing rate. Finally, mREITs earn a spread between the MBS yield and their cost of financing. The flattening of the yield curve results in lower MBS yields, and the resultant compressed spread. This will translate into dividend cuts and stock price depreciation in the future

Over 32,000 shares of the American Capital Agency Corp. (NASDAQ:AGNC) were bought by insiders, including the Chief Executive Officer since the beginning of the current year. In the most recent transaction, the CEO bought 10,000 shares of his company at a price of $32.36. Compared to this, the stock of American Capital Agency is currently exchanging hands at $32.04. The purchases suggest that despite the current low price, management expects American Capital shares to rally in the future.

Similarly, 7,400 and 16,600 shares of Hatteras Financial Corp. (NYSE:HTS) and Apollo Residential Mortgage Inc. (NYSE:AMTG) were bought by their directors and senior executive. This insider activity reflects the management’s bullishness on the companies under consideration.

With regards to the book value, the short-listed stocks are trading at attractive multiples. While American Capital trades in line with its book value, Hatteras Financial Corp. (NYSE:HTS) and Apollo are trading at 14% and 23% discounts to their respective book values.

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